Slow Down: Horizon’s Restructuring Plan Raises Red Flags

Big details lacking in proposal to restructure New Jersey's largest health insurer.

Published on Dec 11, 2020 in Health

In the final weeks before the holidays, New Jersey lawmakers have introduced a new bill with an old goal: the corporate restructuring of Horizon Blue Cross Blue Shield, the state’s largest, and only charitable, health insurer. This is one of the most complex pieces of legislation, if not the most complex, that state lawmakers have considered all year. Horizon is the largest insurer in the individual, small group, and large group markets; covers approximately 3.6 million New Jerseyans, or more than one out of every three residents; and has significant influence over the quality and affordability of health insurance in the Garden State. As such, this proposal is crucial to the future of the state and must be carefully considered in an open and transparent manner. There is no reason to rush the process and doing so would simply invite shortsighted decision making and regrettable mistakes.

In short, the bill would change Horizon’s corporate structure to separate its health insurance operations from other business ventures; it would also change Horizon’s tax liability. This complexity, paired with a lack of critical information and transparency, means that big questions remain unanswered regarding the bill’s potential impact on the access to and affordability of health care for millions of New Jersey residents. State lawmakers would be wise to slow down the process — as the bill is currently being fast-tracked through the Legislature — to better assess the proposal and ensure that any such restructuring centers the needs of the public interest, both in regard to improving health coverage for all as well as protecting the state’s finances.

Restructuring Is Not New, but it Remains Complex

According to the proposed legislation (S3218/A5119), Horizon, which is currently a health service corporation with a charitable mission, would restructure into a not-for-profit mutual holding company. This holding company could then own stock in both non-profit and for-profit subsidiaries. The insurance portion of the business would be reorganized into a stock company, with the stocks wholly owned by either the mutual holding company or intermediate holding companies, which in turn are fully owned by the not-for-profit mutual holding company (simply put, a sizeable chunk of Horizon’s assets would be invested in for-profit business ventures instead of initiatives that promote public health). The bill states that the not-for-profit mutual holding company would remain committed to its charitable mission, while also allowing Horizon to invest more funds in for-profit subsidiaries than is currently allowed by law. The purpose of this restructuring lies, according to Horizon, in the company’s desire to invest more actively in newer technologies, gain ground in the ever-developing health care market, and better serve its millions of customers.

While this is a new bill, restructuring is not a new concept. Over the last few decades, Horizon has attempted to convert its corporate structure many times and in varying forms. Blue Cross Blue Shield affiliates in other states have similarly restructured, dating back to the 1990s, with varying impacts and outcomes. Some, like the conversion in California, resulted in the transfer of a full value of the company’s assets to charitable foundations focused on health. This is what a 2001 conversion law passed in New Jersey requires the company to do if they attempt to become a for-profit company. Some of the most recent conversions in other states — such as Michigan, Florida, Nebraska, and North Dakota — have involved a change to a not-for-profit mutual holding company as proposed in New Jersey, but with varying investment commitments of Blue Cross Blue Shield’s assets. While not a new or unique move on the part of Horizon, the challenge of determining how the change will impact New Jersey’s health care market remains.

Legislators Can Address Market Shifts While Still Ensuring a Fair and Just Process

The health care market has changed significantly over the last three decades. The speed of new technological advancements and a growing understanding of racial disparities in health and health care means that the ideas and investments underpinning health outcomes in the United States are shifting. It is understandable that companies look to increase their competitiveness and further invest assets in these new innovations and goals. However, this does not lessen the need for informed decision making, especially as it relates to the impact on the state’s budget and access to health insurance coverage.

Since the 1990s, public health experts have rigorously studied health insurer conversions and offered key recommendations for states considering similar proposals. In a 2003 Rutgers Center for State Health Policy report, researchers stressed the importance of a deliberate and transparent policy making process. Given the complexity of health insurer restructuring, as well as the unknown impact it would have on health care in New Jersey, state lawmakers should adopt the following improvements to the current legislation and process:

Recommendation 1: Do Not Proceed Without an Independent Evaluation of Horizon’s Assets

The bill does not include the current value of Horizon’s assets — critical information which has determined the fair value of tax payments from Blue Cross Blue Shield when it restructured in other states — nor does it have a fiscal note provided by the Office of Legislative Services to help stakeholders understand its broader budgetary impacts (basic information that should be provided to all elected representatives before voting on any bill). This missing information limits lawmakers’ and the public’s ability to determine whether the proposed changes to Horizon’s tax liability are fair for the state. The changes would result in Horizon making an upfront payment of $600 million to the state by June 2022 (a detail that adds to the question of why this bill needs to be rushed now when the first payment won’t be made for 18 months), along with an additional $650 million payment over seventeen years. Further, there is no guarantee that Horizon will make all of the latter annual payments, as they can be deferred — and expire — under certain conditions. Overall, the proposed change from a health service corporation into a not-for-profit mutual holding company would significantly reduce Horizon’s tax liability.

Until now, the most recent valuation of Horizon’s assets has not been publicly available. The insurer’s annual financial statement for 2019 was just released Thursday, December 10 by the Department of Banking and Insurance (DOBI) on its website, well after the Assembly concluded their second hearing on the bill and despite the report being submitted to the state this past March. It will take time for lawmakers and the public alike to digest this newly available information and determine what a fair deal might look like. The best way to accomplish this would be to have Horizon’s financial statements independently analyzed and discussed in an open hearing to estimate the current fair market value of the company.

State lawmakers need to carefully understand this information before proceeding with any restructuring proposal in order to avoid what happened in Michigan, where lawmakers underestimated the value of their Blue Cross Blue Shield affiliate’s assets when they restructured and, as a result, received lower annual payments than they otherwise would have.

New Jersey has a bad history with receiving lump sum and limited long-term payments like those outlined in this proposed legislation. Experiences like the tobacco settlement of 1998 and Governor McGreevey’s subsequent bonding to fill budget holes proved to be regrettable mistakes for the state budget in later years. State lawmakers should exercise caution, then, on pushing through an opaque plan that has not been fully vetted.

Putting aside the grave mistake of accepting limited payments instead of maintaining long-term funds, the proposed payments of $600 million and $650 million are not clearly dedicated in the legislation. At the very least, receipt of these funds should be explicitly dedicated to improving health insurance coverage and health care in New Jersey — a goal that is consistent with Horizon’s charitable mission.

Recommendation 2: Conduct a Health Impact Study

Any change to the state’s largest health insurer must address its impact on the health of New Jerseyans. So far, there has been no health impact study to allow state decision makers and the public to understand what the effects of this proposed restructuring may be on premium rates, coverage, and choice of plan in the insurance market.

When Blue Cross Blue Shield restructured in other states, it had clear impacts on health insurance markets, and there is no reason to suggest this would not be the case in New Jersey. Statistical analyses of earlier for-profit conversions in other states showed increases in premium rates and possible increased risk selection, which is when insurers have incentive to enroll those in good health, rather than those who are in worse health and may cost more in claims. States that avoided these adverse effects of restructuring often did so by establishing a health-focused charitable foundation with conversion funds. For example, the lifting of the Medigap rate freeze in Michigan was addressed, at least temporarily, by subsidies from the Michigan Health Endowment Fund, which was formed through the restructuring in 2013. The establishment of a foundation is not proposed in the current restructuring legislation in New Jersey.

It’s clear that with changes in corporate structure come changes in behavior, all of which is shaped by the unique market conditions of the state. Understanding the impact that the proposed restructuring may have on New Jersey’s health insurance market is essential to making an informed decision that prioritizes quality and affordable health care for all New Jerseyans.

Recommendation 3: Demonstrate a Commitment to the Public and Horizon’s Charitable Mission

In its current form, Horizon has a charitable mission which, according to S3218/A5119, would remain the case after restructuring — but more can be done to affirm Horizon’s commitment to the public good. Because the state Attorney General (AG) has jurisdiction over charitable organizations, clear and publicly available guidance from the AG’s office on whether Horizon would be able to adhere to their charitable mission under a new structure would be welcomed, as it would help ensure Horizon’s commitment to the public is vigorously protected. Additionally, the public’s voice should be brought to the forefront in the legislative process. Holding more hearings with adequate notification to receive input from the public, as well as committing a position on the new mutual holding company’s board to a representative of consumer voices, would show that the commitment to the charitable mission is not solely in word, but in deed.

This is a Complex Bill That Should Not be Fast-Tracked

Rarely has it paid off for lawmakers to rush through a bill where crucial details are not fully understood. Mistakes made with the three-month budget bill highlight that haste can lead to regrets. Lawmakers should demand a full picture of the impact of this legislation before committing to changes that will affect the state’s budget and access to health insurance for all New Jerseyans for years to come.